2013 Tax Brackets Set, Finally

With just days to spare, Congress passed a tax bill in late 2012 that set the rates for 2013, cleaned up some loose ends for 2012, and at least in theory removed some uncertainty about tax rates for the coming few years. "In theory" because nothing stops another tax bill from coming along that shakes it all up again.

First, the easy part - the 2013 brackets are similar to those for 2012, but with the 39.6% bracket restored at the top (the Bush tax cuts had done away with that temporarily). 2013 Tax BracketsThe chart to the left shows the brackets and rates for Single people and Married couples Filing Jointly. A few comments:

  • The rates shown apply to ordinary income. Long-term capital gains and qualified dividends are taxed at a lower rate - which could be 0%, 15%, or 20% depending on your taxable income.
  • Brackets are based on taxable income, so you can earn quite a bit more than the amounts shown before you'll actually fall into the indicated bracket.
  • Those falling into the 25% or higher tax brackets are likely to pay a marginal rate somewhat different than that shown; it's possible in lower brackets as well. As your income increases, you can for example lose some of your itemized deductions, or pay AMT, raising the effective tax rate on that "last dollar earned."
  • These brackets reflect just income taxes, but in 2013 the new Medicare surcharges also take effect. A 0.9% surcharge applies to earned income that exceeds $200,000 single or $250,000 MFJ; investment income is taxed at 3.8% to the extent it pushes your AGI over these same threshold amounts.
  • 2013 has the distinction of creating the narrowest income bracket in recent history - Singles will pay 35% on a $1,650 sliver of income, then 39.6% on the rest. That's the kind of weirdness that happens when our Congress waits until 2AM in late December to pin down the details. Apparently they agreed to $400,000 for the highest bracket, perhaps not noticing that the next bracket down was almost at the same level.
  • While the upper brackets fill the chart's vertical space, they aren't really of interest to many people - in 2010 less than 3% of tax returns reported AGI over $200,000, with much fewer having taxable income in those higher ranges. And in the higher brackets, it's common to see significant earnings from capital gains, which are taxed at a different rate. I think it's interesting, though, to see the relative sizes of each bracket, both at different income levels and for the two most common filing statuses.

The tax bill also set the AMT exemption amounts for 2012 at levels similar to 2011 and, thankfully, added a permanent annual inflation adjustment to that exemption. Because of that change millions of taxpayers won't have to pay AMT for 2012, and those who do will generally pay less. And we won't have to run through this fiction of running AMT projections based on the AMT scheme from eons ago, just because Congress didn't get around to updating that AMT exemption for more than one or two tax years at a time. I may be able to retire the phrase "AMT patch."

There's a lot more to the tax bill, but that's the gist of the brackets. Clients, check in with me if you want a projection done for this year - because of the growing mix of phase-outs and whatnot, it's become even more difficult to predict your marginal bracket without doing a detailed analysis using the software. The chart's just a starting point.